Fitch Affirms Aflac Inc.'s Ratings; Outlook Negative

December 01, 2016 03:49 PM Eastern Standard Time

CHICAGO--(BUSINESS WIRE)--Fitch Ratings has affirmed the 'A+' Insurance Financial Strength (IFS)
ratings of Aflac Inc.'s (Aflac) insurance subsidiaries. Fitch has also
affirmed Aflac's Issuer Default Rating (IDR) at 'A' and senior debt
ratings at 'A-'. The Rating Outlook remains Stable for Aflac's holding
company ratings and Negative for its insurance subsidiaries. A full
ratings list follows at the end of this release.

KEY RATING DRIVERS

The affirmation of Aflac's ratings reflect the company's extremely
strong competitive position in the supplemental accident and health
insurance markets in Japan and the U.S., extremely strong earnings
profile and very strong capitalization. The ratings also incorporate the
impact of slow economic growth in Aflac's key Japanese market and its
sizeable exposure to Japanese sovereign risk including significant
concentration in Japanese government bonds (JGB).

Aflac's IFS rating is capped at one notch above Japan's sovereign rating
of 'A', due to Aflac Japan's exposure to Japan's economy. Aflac Japan
comprises more than two-thirds of Aflac's assets, capital and
profitability, making Japan's economy a significant business and ratings
factor. Factors contributing to the notch between Aflac's ratings and
Japan's sovereign rating include Aflac's sizeable global diversification
and its ability to generate strong financial results from its U.S.
operations.

Aflac maintains a dominant market position in both Japan and the U.S.
selling cancer and other supplemental accident and health insurance
products. The company's key competitive advantages include its low-cost
operations, continued product innovation and brand name recognition.
However, Aflac faces growing competition in both Japan and the U.S.

Fitch views Aflac's capitalization as very strong with an estimated NAIC
RBC ratio above 800% and Japanese solvency margin ratio (SMR) of 935% as
of Sept. 30, 2016. Aflac Japan's SMR is bolstered by unrealized
investment gains and remains sensitive to interest rate and foreign
exchange rate changes, although the company has taken steps to mitigate
this risk. Also supporting Fitch's view of Aflac's capitalization is its
Prism capital model score of 'Extremely Strong' at year-end 2015.
Aflac's financial leverage ratio remains within rating expectations at
26% as of Sept. 30, 2016.

Aflac has significant investment concentration in JGBs and related
agencies, which represent approximately 40% of total investments as of
Sept. 30, 2016. In an effort to mitigate low yielding JGBs and enhance
portfolio yields, Aflac Japan continues to employ alternative investment
strategies that increase asset risk. However, Fitch views the company's
overall credit quality as acceptable, evidenced by its risky asset ratio
of 40% compared with approximately 80% for the industry.

Aflac Japan's yield enhancement strategies include yen-denominated
private placements and an expanded U.S. dollar program, which is
partially hedged. The U.S. dollar program includes senior secured bank
loans, most of which have below-investment-grade ratings, and high yield
corporate bonds. The company also increased its allocation to
dividend-focused U.S. publicly traded equities and dividend-focused
yen-denominated publicly traded equity securities.

Aflac's extremely strong earnings profile reflects the company's
disciplined underwriting over an extended period of time and limited
exposure to market-sensitive products. However, the company faces
earnings headwinds from low interest rates and increasing hedge costs.
Aflac reported $2.2 billion of net operating earnings for the first nine
months of 2016, a 9% increase over the prior year, which was largely
driven by the stronger yen. When the impact of foreign currency
translation is excluded, operating earnings declined by 5% during the
period.

Pretax operating margins remained extremely strong at 21.1% for Aflac
Japan and 20.5% for Aflac U.S. for the first nine months of 2016
compared with 21.7% and 19.1%, respectively, in the prior year period.
Fitch expects the company's profitability metrics to continue to exceed
rating expectations over the intermediate term, due to its scale
advantage, disciplined underwriting of mortality and morbidity risks and
its shift away from lower-return interest-sensitive first sector
products.

Fitch views Aflac's asset/liability management as adequate, as
investments and liabilities are reasonably well matched. Aflac is
exposed to material reinvestment risk due to its long duration
liabilities in Japan, but has taken various steps to reduce volatility
associated with interest rates.

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